Inflation And Your Taxes

By Tim Greife, Financial Advisor

You’re probably well aware of inflation’s sting in recent months, with higher prices across the board from cars to groceries to energy. The consumer price index climbed 7.5% last year – the biggest jump in 40 years. Large inflation jumps typically lasts only a short period of time. Numerous discussions have occurred surrounding the Fed raising interest rates to curb inflation.


What you might not know is that inflation may have an impact on your taxes in a variety of ways. That’s because lawmakers have taken a scattered approach to indexing various tax provisions for inflation over the years.


Here is how your taxes could be affected in several key areas:

 

  • Real estate. If you sold a home last year and are subject to capital gains taxes on profits, the amount before taxes kick in remains at $250,000 for single filers and $500,000 for married couples filing jointly. These amounts that have not changed since the provision was enacted in 1997. Likewise, caps on state and local property, income and sales tax deductions have not budged since they were enacted in 2018. The $10,000 limit remains in place despite rapidly appreciating property values and associated taxes. House Democrats did pass an increase to $80,000 through 2030, but it’s a provision in the currently stalled Build Back Better legislation.

  • Income. Income brackets are indexed, meaning that you may not be subjected to higher rates simply because you’ve received larger-than-usual raises due to higher cost-of-living increases, pay jumps from job moves, or adjustments to a tight labor market. That helps avoid “bracket creep” — at least in federal taxes. The take-home pay of wage earners, who are making 7.3% more on average since the pandemic, may rise because of inflation adjustments to withholding tables. The standard deduction was adjusted  upward slightly, to $25,100 for married couples (up $300 from the prior year). Married filing separately and singles get an increase of $150 to $12,550.

  • Retirement. Inflation will have the biggest impact on retirement savings because a majority of retirees are on a fixed income. For those who are still saving, increasing tax-deductible contributions to retirement accounts can help. If you contribute to a 401k, it’s now tax deductible up to $20,500 for those under 50, an increase of $1,000. Contributions to traditional and Roth IRAs remain capped at $6,000. If you’re over the age of 50, you can make a catch-up contribution of an additional $1,000.

Please reach out to us with questions regarding 2021 taxes and planning for 2022.